Firm Organization and Market Structure: Centralization vs. Decentralization

Abstract

The profitability of a firm is jointly determined by it's organizational structure and the market structure. To explore the effects of market factors on optimal organizational structure we develop a real-time information processing model of a multi unit firm in a dynamic duopoly environment. Our model is the first to match with recent empirical findings (Mendelson 2000, Delmastro 2002, Acemoglu et al. 2007). We find decentralization dominates for products with short lifecycles but in general there is no unique optimal organization structure over time - when product market competition is intense, decentralization outperforms centralization in the initial phase of the product lifecycle, centralization is superior in the intermediate phase, and decentralization outperforms again at the final phase. Thus organizational change also appears to be a natural part of the lifecycle as well as a response to economic shocks. Moreover, we also find that the performance of decentralization is superior when: (i) consumer tastes are more homogenous; (ii) consumers are more sensitive to store practices; and (iii) a larger number of markets are served.